Tuesday, August 22, 2023
Foreclosure can be a daunting prospect for private lenders, but it shouldn't deter you from exploring the world of private lending. In fact, foreclosure can be your ally if approached strategically.
Let's delve deeper into how you can eliminate the fear of foreclosure and turn it into an asset as a private lender:
When you evaluate a property for lending, one of the key factors you consider is the After-Repair-Value (ARV) or the project's value once it's restored.
By lending only 65% of the ARV, you create a safety net of protective equity.
This cushion serves as a buffer in case foreclosure becomes necessary.
Additionally, opting for relatively short-term loans, typically spanning 6 to 12 months, minimizes your time exposure.
This means you're not locked into a loan for several years, safeguarding your investment from dramatic market changes.
Short-term loans and low Loan-To-Value (LTV) ratios are your risk-reduction allies.
In the event that foreclosure becomes the only viable option, it's crucial to recall why you initiated the loan.
Even in the worst-case scenario where the borrower defaults, the property doesn't sell, and loan payments are overdue, your investment remains protected.
Your money is secured with a first lien position, a powerful position in the event of foreclosure.
This emphasizes the critical importance of due diligence in the loan origination process.
While due diligence can't prevent a borrower from defaulting, it significantly reduces your exposure.
1. Cherry Pick the Best Borrowers: I’ll say it until I’m blue in the face: People, not projects, will be the worst part of real estate investing. SO, if you’re lending to someone, make certain that they deserve to do business with you.
2. Diligence is the key: Do they have enough skin in the game, do they have an exception borrowing history (from their Wells Fargo Credit card, to their home mortgager they consistent and on time - a minimal of 2 or 3 30-days late is ok, as long as their pattern is high performance.
3. Cherry Pick the Best Loans: Due diligence is paramount. Have confidence that your assessment, considering all possible outcomes, ensures you receive both principal and interest payments. Avoid loans that might lead to foreclosure headaches.
4. Expect Some Defaults: Understand that a portion of your loans will default, and borrowers may miss payments. Be mentally prepared for this reality, trusting that your due diligence was thorough.
5. Prepare for Legal Action: If foreclosure becomes necessary, know that an attorney or foreclosure company will handle most of the legal work. While there may be upfront costs, they are minimal compared to your investment and can be recouped through property recovery. And move swiftly! I was slow on the draw, and only when I brought my attorney into it with a sternly-worded letter of impending default did it get fixed.
6. Stay Calm and Confident: Remind yourself of the extensive research, professional advice, and careful consideration that led to your lending decision. You've weighed all possible scenarios, including foreclosure. Stay composed; it will work out.
Private lending is not like investing in the stock market, where you rely on a company's disclosures.
As a private lender, you invest in a piece of property (and mores, the borrower), often at a significantly lower value than the property's worth, providing you with a safety net.
You've thoroughly assessed the situation, and foreclosure is not a dire outcome if you've done your homework.
In many cases, borrowers take action when faced with foreclosure, such as catching up on payments, refinancing, or arranging a deed in lieu of foreclosure.
As a private lender, you have professionals to handle the legal aspects, ensuring a smoother process.
So, ask yourself: Are you still fearful of foreclosure, or do you see that with proper preparation and professional guidance, your investment remains secure, and you can still recoup your funds?
Embrace the safety and opportunity that private lending offers.
Founder REI Accelerator
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